(March 11): Australia’s dollar has emerged as an unlikely haven, buoyed by elevated oil and gas prices and growing bets that the central bank may raise interest rates as early as next week.
The Aussie climbed to its highest level since June 2022 at 71.68 US cents and more than a 35-year high against the yen on Tuesday, making it the top-performing major currency this year. Citigroup Inc says the rally may extend to 75 US cents within three months despite the Aussie’s usual sensitivity to the greenback and broader risk sentiment.
The currency could remain relatively insulated from broader market volatility as traders and economists ramp up expectations that the Reserve Bank of Australia will hike interest rates to contain inflation. The Aussie may also continue to draw support from Australia’s position as a major energy exporter if elevated oil and gas prices persist.
“The Aussie is a better option than other currencies in the current environment,“ said Nick Twidale, chief market analyst at AT Global Markets in Sydney. However, it “plays against the traditional direction that we normally see in times of heightened geopolitical concerns, where the Aussie weakens on most fronts and usually most dramatically against the yen”.
Hawkish comments from the RBA that it won’t hesitate to raise the policy rate if the Iran conflict further stokes inflationary pressures have also supported the currency.
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Swaps are pricing in more than a 70% chance of policymakers raising interest rates on March 17, helping keep Australia’s bonds among the highest-yielding in the developed world. Rate bets have pushed the Australia-US benchmark yield spread to its widest since October 2022 on Tuesday, further supporting the currency.
In the meantime, the options market early Wednesday assigned an almost 33% chance the currency will touch 75 US cents within three months, according to data compiled by Bloomberg.
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“Assuming oil has peaked but remains elevated, combined with a hawkish RBA, we think momentum could soon build up again,” Citi strategists including Dirk Willer wrote in a note to clients. “Even at the height of the Iran-related market stress, Aussie barely sold off, given a positive impact from terms of trade and a hawkish central bank.”
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